Question

Can nominal GDP ever be less than real GDP? Please explain.

Answer 1

The majority of the time, the economy has a slight inflation rate of 3% annually. This means that nominal GDP will be higher because it is not adjusted for inflation. Real GDP adjusts for inflation, which means it shows GDP in relation to the change in the value of currency from the previous year. Because of this, it will appear that real GDP is lower than nominal GDP due to inflation.

However, there have been rare instances of deflation in US history, primarily in early 1930s during the Great Depression. During deflation, prices drop each year, which would change how Real and nominal GDP typically appear. In the occurrence of deflation, real GDP would be higher than nominal GDP. Real GDP would show the 0% or negative percentage of inflation, causing the real GDP value to appear higher than nominal.

So typically, nominal GDP is higher than real GDP. However, it is very important to know this isn't always true and also the reasons why it can vary.